11/15/2022

speaker
Operator

and thank you for standing by. Welcome to the Pyrogenics Canada third quarter 2022 business update conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, David Waldman. Please go ahead.

speaker
David Waldman

Good morning, and thank you for joining PyroGenesis' third quarter 2022 financial results and business update conference call. On the call with us today are Peter Pascali, Chief Executive Officer, and Andre Minella, Chief Financial Officer. The company issued a press release on Friday, November 11, 2022, containing a business update and financial results for the third quarter ended September 30, 2022, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Investor Relations. The company's management will now provide prepared remarks reviewing the financial and operational results for the third quarter ended September 30th, 2022. I'd like to remind everyone that this discussion will include forward-looking information that is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided on this call speaks only as the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions, and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. Pyrogenesis disclaims any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, there may also be references to certain non-IFRS financial measures, including references to adjusted net loss and adjusted EBITDA, which do not have any standardized meaning under IFRS, and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of adjusted net loss and adjusted EBITDA net loss, please refer to the company's management discussion analysis, which along with the financial statements are available on the company's website at www.pyrogenesis.com and the company's corporate filings on CDAR at www.cdar.com. With that, I'll now turn the call over to Peter Pasquale, President and Chief Executive Officer. Please go ahead, Peter.

speaker
Peter Pascali

Thank you, David, for that introduction. And thanks to everyone for joining us today on our call. Our Genesis delivered another quarter with strong margins against a difficult logistical and inflationary environment for heavy industry manufacturers and their customers. This demonstrates our careful yet committed approach to diversification that provides various guards against rising inputs, both direct and macro, such as labor, currency and supply chain disruption related costs. With our strong production margins firmly established and our operational and sourcing approaches proven again as not just viable but sustainable and secure, we can remain squarely focused on maturing the commercialization plan enacted over the past two years. That implies turning a very large pipeline into sign new business, finalizing various ventures that have been in long-term testing, planning, or negotiation, and moving certain of our R&D initiatives into more fully realized customer-ready solutions. Some of our customers experienced implementation or order delays due to the continued infrastructure, personnel, and parts availability challenges affecting industries across the spectrum. However, we remain confident in our positioning and long-term plans given our continuing introduction of niche plasma torch solutions, a focus on large companies seeking technology solutions for greenhouse gas reduction and production output optimization and our above industry average margins. Margins that continue to outpace both the sector we are in and even the industries we serve. Those include the industrial machinery sector at 27.6% gross margin, the aluminum industry at 20.6%, iron and steel at 25.3%, metal mining at 24% and aerospace and defense at 8.56%. Combined with the upcoming commencement of major trials of our key plasma products and the near completion of various testing and certification process by other clients, we continue to see a positive future with continued strong margins. Importantly, as the global economy continues its transition out of the disruption it has faced over the past several quarters, a return to logistical and resourcing stability for heavy industry and government customers throughout the rest of 2022 and 2023 is anticipated, but with possibly a renewed sense of urgency. The company's backlog of signed contracts is approximately $26 million, while the potential contract pipeline has expanded significantly. We continue to execute on our business growth strategy by offering technology solutions that provide benefits from greenhouse gas emissions reduction, clean electric fuel sources, safe waste destruction, and improved production output and quality that take advantage of the company's expertise in patented ultra-high temperature processes for heavy industry. We also continue to build upon established customer relationships, introducing new solutions and entering new markets, setting an ongoing success for years to come. Despite the worldwide macroeconomic headwinds, which have been exasperated by international supply chain volatility, both of which have affected our clients' planning, logistics, and spending, Pyrogenesis continues to demonstrate its ability to execute productively in Q3 2022. While existing and prospective customers saw delays as they continued to manage their own backlog of projects through their resource personal infrastructure availability, and the stage setting of the first half of the year continued into Q3, we maintained our focus on production efficiency, steady progression towards full commercialization for our emerging business lines, the pursuit of innovation, and expanding the relationships with existing and potential clients. In the face of continued macro uncertainties, we remain firm in the belief that pyrogenesis is well positioned and remain confident in the potential sales increases cited in the previous Q2 outlook through 2023 and beyond. The reasons for this are simply fourfold. First, we believe that the heavy industry commitments to fossil fuel related carbon reduction measures made years ago are quite frankly here to stay. This commitment has only intensified in the face of increased pressure from rising carbon pollution penalties combined with the significant volatility seen in fossil fuel availability over the past three years. Second, concerns focusing on commodity security are driving optimization efforts across the metal sector with aluminum producers, steel makers, and other metal producers seeking in-line technology solutions to improve output percentages of primary, secondary, tertiary, and even unprocessed waste from other mineral production sources previously considered as exhaustive. Third, the trending global shift back to increased electricity-based power will result in more major infrastructure creation across renewables, hydroelectric, and even nuclear installations, benefiting industries and technologies such as pyrogenesis, with electricity-ready solutions. Last but not least, Pyrogenesis' clean, electricity-based technology has proven effective, efficient, and to such a degree that even in the absence of the above, its benefits cannot be ignored. Pyrogenesis' R&T team has been dedicated over the past three decades to plasma-based environmental solutions. These solutions are already impacting heavy industry as they prioritize the many issues facing them today. Greenhouse gas emissions reduction, fuel switching to combustion-free electric sources, improved value recovery of metal waste streams, enhanced metal production output from the same input, safe destruction of hazardous waste, and more rapid and higher quality metal powder production for component weight reduction are just to name a few. This underscores our belief that we are well positioned with respect to both our recent critical milestones and our long-term positioning. We look forward to additional milestones that have been in the works for several quarters, including the first ever in-factory trials of plasma burners within an iron ore pelletization furnace. a major upstream step in the steelmaking process, with two separate global iron ore producers. The conclusion of the certification process for the company's titanium metal predators from a major global aerospace firm, and the potential sale of various aluminum industry solutions related to metal dross processing and fuel switching. Over the past several years, Pyrogenesis has successfully positioned each of its business lines for growth by strategically partnering with multi-billion dollar entities. These entities have identified Pyrogenesis offerings to be unique, in demand, of such a commercial nature as to warrant a long-term supportive relationship that the company has experienced while it ramps up various technologies to commercialization. The intense pressure on heavy industry to reduce their fossil fuel and greenhouse gas impact while improving their output allows pyrogenics to expect interest from many industries, but especially aluminum, iron ore, and steelmaking to increase as the trend to fuel switching from fossil fuel burning gases to clean electric sources such as plasma torches grows. I'll be back with some final thoughts at the end, but at this point, I'd like to turn the call over to our Chief Financial Officer, Andre Manella, to go over the financials in detail. Andre? Thank you, Peter, and good morning, everyone. I'll begin with the income statement, where total revenue for the three-month end of September 30, 2022 was $5.7 million compared to $9.3 million for the same period last year. Total revenue for the first nine months of 2022 was $15.7 million compared to $23.9 million for the same period of the comparable year. The revenue variation was mainly due to a decrease in sales related to Drossrite, as well as a decrease in support related to the U.S. Navy and biogas upgrading and pollution control, but offset by an increase in pure VAP and torch sales. As of November 10, 2022, The company had a backlog of signed or awarded contracts of approximately $26 million. Gross profit for the three months ended September 30th, 2022 was 4.1 million or 73% of revenue compared to a similar profit of 4.1 million with 43% of revenue for the three months ended September 30th, 2021. As for the nine months ended September 30th of 2022, gross profit was 7.7 million compared to 11.1 million for the same period last year. The increased quarterly gross profit was caused mainly by a decrease in direct materials, manufacturing, and overhead costs, offset by a variation in employee compensation, subcontracting, and foreign exchange. Selling, general, and administrative expenses were $5.9 million and $18.6 million for the three- and nine-month period ended September 30, 2022, respectively. That compares to $4.9 million and $15.3 million for the three and nine month periods of last year respectively. The increase in SG&A expenses was primarily due to the effects of the pyro green gas acquisition that was completed in August of 2021, an increase in employee compensation, professional fees, office in general, travel, depreciation of property and equipment, and of the ROU assets and government grants. Additionally, the share-based expense increased to $932,000 for the recent quarter in comparison to just under $700,000 for the same period of 2021. Research and development expenses for the three-month end of September 30, 2022 was $290,000 compared to $394,000 for the same period of last year. The decrease in R&D expenses is primarily related to the decrease in employee compensation and subcontracting materials and equipment costs, but offset by the variation of IPC. During the first nine months of fiscal 2022, net spending on internal R&D was just under 1.6 million. And that's comparable to a little over 1.5 million of 2021, but primarily due to a slight increase in R&D activities that were performed. Comprehensive loss for the three months ended September 30, 2022 was 4.1 million compared to an income of 0.6 million for the same period as last year. The modified EBITDA, which we used to measure ongoing operations, was a loss of $0.6 million for the current quarter compared to a loss of $0.2 million for the same quarter of 2021. The modified EBITDA excludes $0.9 million of non-cash share-based expense and a $1.8 million adjustment to the fair market value of strategic investment due to the decreased market value of common shares and warrants of HPQ Silicon resources owned by the company. The modified EBITDA also adjusts for the following items, which increase in the quarter. $61,000 for depreciation of property and equipment, $127,000 for amortization of intangible assets, and $177,000 of financial expenses. As of September 30th, 2022, the company had a $2.4 million of cash and cash equivalent balance on its balance sheet. As mentioned, our growth profit this quarter remains high. And even without the one-time IEP revenue, raising the growth margin substantially to 73%, the growth margin would still approach 30% for the quarter. A number that surpasses many of our competitors and the averages for companies and industries we primarily serve, which include Illumina, iron and steel, aerospace, and defense, and industrial machinery. Also to note for the IT sale, we wanted to mention that we have not press released the details of the IT sale, as we are still waiting for our customers to also do their press release. And a final note, it's also beneficial to mention that the company has projects at various phases of completion, and those closer to the final delivery stage incur costs and thus corresponding revenue at a slower pace or at different various phases. At this point, I'll turn the call back to you, Peter. Thank you very much, Andre. As you can see, Pyrogenesis considers 2022 to be a strong platform for which future growth will step. In the face of global headwinds and uncertainty, we are committed to focusing on the production efficiency, steady progression towards full commercialization for emerging business lines, the pursuit of innovation, and deepening the relationships with existing and potential clients that have served us successfully to this point. Providing heavy industry with technology solutions to pressing environmental, engineering, and energy challenges while meeting their carbon reduction goals remains Pyrogenesis' primary goal and focus. In conclusion, we're very pleased with the progress we have made during the quarter and believe we have set the stage for continued success. We remain committed to driving shareholder value and look forward to providing further updates as developments unfold. I'd like to thank you for joining the call today. At this point, we'd like to open the call up to questions. Operator?

speaker
Operator

Thank you. If you would like to ask a question at this time, please press star 11 on your telephone.

speaker
spk01

One moment while we compile our Q&A roster. And our first question comes from the line of Steven Fine.

speaker
Operator

Your line is open. Please go ahead.

speaker
Steve

Good morning, gentlemen.

speaker
Peter Pascali

Good morning, Steve.

speaker
Steve

Hi, how are you? I have a lot of questions, so if you want me to stop, I can stop and I can come back if there's other questions. All right, let's talk about financials. My greatest, you know, I'm a technical person. And, you know, my allure of your company is, you know, all these areas that you're in. And, you know, with the notion that, you know, as you state, your technology is unique, it's serving a purpose, hopefully one of these things are going to hit. But my greatest concern right now is, you know, with all the macroscopic issues that you've alluded to, And looking at your financials, you know, there's a clear decrease in, you know, in cash flow and cash available. And so my greatest concern is, you know, will you have the financial – will the financial wherewithal exist for you to be able to, you know, continue to, you know, realize – you know, your goals. Because if I look at last year, I believe you had $10 million in cash. There's $2 million in cash. Now, this is memory. Maybe I'm incorrect. But, you know, when you look at the financials, the financials are you're spending more money. And I mean, you know, if it's appropriate to spend money to get to your goal, that's one thing. But the other question is,

speaker
Peter Pascali

uh you know are you going to have enough money to to really uh you know realize what you need uh steve is very good points and from from the outside i could see where we may be more of a concern than from the inside um to to speak to your first point yes we are diversified on many different business lines and that has served us very well as it has saved us in the past Because had we been committed to one business line alone and that slowed down, we may have had a significant trouble. But this has allowed us to pursue other business lines that we are managing when something else slows down. So it's like a multi-legged stool. Instead of having just one leg, we have multi-legs. If one of them is a little bit slower or weaker, we can rely on the other. So it serves us very well. The trick is, as you point out, Steve, is to know how not to go too far afield. Not to try and be everything to everybody. And I think we've managed that very well. We've established enough business lines to sort of de-risk ourselves, but not gone too far afield as to stretch our resources to a point where it cripples us. Having said that, we believe that we have enough tools in our toolbox and enough availability in terms of cash flow to manage all these successes. One thing that you don't have that we have internally is an appreciation of when the cash is coming in, from where, and how. So without saying something that I shouldn't be saying here because it's not considered to be a public disclosure arena, we are extremely confident that we will be able to manage these cash needs or labor needs as they come forward.

speaker
Steve

Okay.

speaker
Steve

There's a level of trust. I can only look at your numbers. You know, I've seen many, you know, I've spent my life looking at, you know, technical companies like yours. And, you know, and certainly these areas are quite unique. What you're doing is quite unique. You're, you know, and exciting. All right, so let me accept that.

speaker
Peter Pascali

Well, Steve, let me just point out that And I'm sure you're going to have a comment on this, but our accounts receivable are $23 million. And after review, there's been no write-up of a reserve, and there's a reason for that, because we do not think they're impaired. And on that note, for those that are listening to this, this particular Q3, you'll notice it doesn't say that it was not reviewed. So it was reviewed by our accountants. And so they did not feel it was necessary to take a reserve. So the accounts receivable are good, $23 million. And we always have, not that we want to tap into it, but we always have a strategic investment in HPQ that we're very confident in. So when you look at the other non-cash but liquid items, they're quite significant. So that's just something to keep in the back of your mind when you're looking at our balance sheet.

speaker
Steve

But Peter, that's fine. But when you look from, you know, I have a financial mind. And when I look from, you know, quarter to quarter, it seems like there's more being spent, cash going down. You know, the comment, very frankly, and please take this in all due respect, to make a comment, yeah, we got a 73% gross profit. That's immaterial because that's relative to Is that going to be consistent with all sales? I mean, it's like taken out of context. I mean, look, the bottom line is I'm a stockholder. I trust you guys. I'm hanging in. I'm just expressing my concern. I want you to realize your goals and so forth. I'll accept that. All right. Let me go on to the next question.

speaker
Peter Pascali

I appreciate that.

speaker
Steve

Okay.

speaker
Peter Pascali

Go ahead.

speaker
Steve

Let me go on to my next question. You know, you've spoken about this, the additive thing. Let me call, let me, you know, and I'm technical, so you know that. All right. So the 3D additive thing, and I totally understand, you know, what you're going through, because I was a hazardous chemical manufacturer. I was ISO, and I, you know, and I had to do the same thing. And, you know, as you've described, You know, you have to get approved by your various customers so they know, you know, and it's a big step. And the other point that I would like to point out in your favor, once you get accepted, you know, that's a big step because that means other competitors, you know, can't get in that quickly. But the real question is, The first question is relative to the additive thing. How is your additive offerings unique versus competition? Because you've been in this for a while. And if I remember historically, you licensed stuff off. But what you have now, does it have a uniqueness?

speaker
Peter Pascali

Yes, it does. Yes, it does, Steve. It does. How could I make it simpler? It's... The quality of powders have many different aspects to it. But basically, our quality of powders, we believe, are unique. And I guess the market believes so as well. And the uniqueness, depending on the OEM, may have to do with its ferocity, how spherical it is, or it may have to do with the amount of oxygen that it has incorporated into the powder. And I can go on to a list of different aspects to what makes a powder unique. of a quality that's more desired over another. Having said that, you do know our history, Steve, which is essentially we delayed coming out with our next-gen production line. And the reason we did that was essentially that we wanted to lock in a better production line than what we had at the time. What do I mean by that? It's cheaper to make. Make, I mean, the CapEx. It's cheaper to operate. and the production rate is much higher. So for somebody such as ourselves that are engaging with OEMs who have a rule that once they give you a contract, you cannot change your production line, it was imperative for us to get the right production line in place where we can make the most money if we write a nice contract with them. Now, here's a small company like Pyrogenesis telling these multi-billion dollar entities Can you please wait a moment? Because we want to do something better. They waited, Steve. They waited. So I'm not going to suggest why they waited. There must be a reason. I know I'm a nice guy to deal with and hang out with a beer at a bar, but I think it's got more to do with our powder, our powder quality, whatever that is. And so we also took a long-term view of things, which is what we do in this company, Steve, as you know. Rather than go with the production strategy that we had and possibly lock down a contract quicker and get the press release and the credibility that comes with that, we take a longer approach and a longer view of things that it's best to come out with what we call our next gen, which we have done. And if you recall, we locked that down, I think it was in April, and within 30 days we had a contract from a large OEM in North America to qualify our powders And that's what we've been speaking to in our recent press release. And as you've been following it, Steve, and other people, it's progressing quite nicely. So when you ask me why is everybody excited about it, I think it's got to do with the quality of powders. And now I think people are getting a sense that the cost of production is significantly less than what it was before. And we were probably a little bit under market at the time anyways. So... I think that's what it is, Steve. I think it's got to do with our overall quality of powder. I mean, there must be something there. Without me going into specifics, and I can't speak for our potential clients, but everything seems to indicate that we're doing something that's worth waiting for.

speaker
Steve

And when do you expect this Q-Sting approval to be finished?

speaker
Peter Pascali

I think in our press releases, we mentioned that we had an audit of our quality process I have to be careful because I don't want to say something I haven't said in the press release. And they came up with what I call a number of suggestions. And at last release, I believe we mentioned that we were done with something like 90% of them, and we're down to the last handful, and that that should be completed before year-end. And I'm very confident we'll have something coming out before year-end that confirms that.

speaker
Steve

So once it's been completed... Go ahead, finish your story.

speaker
Peter Pascali

I was going to answer, I think, the question you're going to ask. What is the next step after that?

speaker
Steve

Well, the next question, my next question would be, all right, fine, you're now approved. So are you immediately going to get an order? And do you have any sense of what that, you know, of how big that could be?

speaker
Peter Pascali

I have absolute, I can't comment on that, Steve, here. But I suspect if somebody's qualifying us, and they're spending a lot of money to do it, I hope it will be a vision to actually order some powders.

speaker
Steve

Or else it's a waste of time for both parties.

speaker
Peter Pascali

And I can't speak to quantities. I have some idea, but it's not verified. These entities, they're OEMs. They're large companies. They have a need for titanium powder.

speaker
Steve

The bottom line here is, okay, so, you know, you've answered the question. You know, you avoided, you know, I'm not the improper word. Excuse me. You know, obviously, you know, obviously, if they're, you know, if they're getting you approved, Normally, when someone gets you approved, that means they want to do business with you. And, you know, to me, the most, you know, if everything you're putting out is so, the thing that's so unique is that if you hit on one of these areas, you know, then the financial question goes away, in my mind. All right. My next question. My next question is, you made this acquisition of biogas, all right? I saw, you know, recently you had an announcement that, you know, you can take methane, you can turn it into hydrogen, that's wonderful, but where's this biogas thing, where's this biogas acquisition actually going? I mean, it seems like it's putting a lot of, you know, overhead and cost and so forth, but when is it going to You know, where's it going and when is it going to materialize?

speaker
Peter Pascali

Okay. So I don't think I'm talking out of school when I say we bought it. I can't remember the right price. Roughly $4 million. But we didn't pay $4 million for it. It's based on certain milestones occurring. I can – all of my – No, I remember that.

speaker
Steve

That was very – no, I remember that. That was very smart.

speaker
Peter Pascali

Okay. So it was an opportunity to marry up our engineering expertise with a company that sadly lacked the discipline that we've developed with our relationships with players like the U.S. Navy, you know, multidisciplinary players who've taught us how to be disciplined. And we added that value or we are adding that value to this company. The reason why we did it was it marries up to some extent with our environmental solutions aspect, but also we perceived it to be a tidal wave of need and a lack of suppliers in their space. Now, this is the 30,000-foot level perspective, Steve. However, and I've mentioned this in press releases, the little nugget in there was the technology they had to convert coal-carbon gas to hydrogen. Hydrogen is valuable. This coal-carbon gas is very similar to the gas, the syngas, that comes off of our land-based systems. What will be a real coup here is if we can take this coal-carbon gas conversion concept, apply it to our syngas, And instead of using that syngas to make cheap electricity and heat to turn it into a more expensive hydrogen, it would catapult our land-based systems into a significantly economically viable solution. So it'll take our land-based systems, which are good on their own, but extract significant value from the syngas as opposed to what it was currently doing. So that's the hidden gem there. So the concept behind the acquisition was twofold. One, it just made sense from the industry and their lack of engineering, et cetera, et cetera. But the secret nugget or the nugget that really excites me is the potential to convert our syngas into a more valuable output.

speaker
Steve

And as I question you in written communication, this syngas that you're talking about, Is that not a big man's game? And for you to really materialize there, you would have to then connect with some larger companies to have the capabilities of scaling that up to the proper level.

speaker
Peter Pascali

Well, I mean, we have smaller systems. A lot of these island waves, they're small. They're almost like mini aircraft carriers, right? I mean, they're small, like aircraft carriers, right? So to destroy their waste is one aspect, and then converting to something, syngas, which could be used on site there to convert it to electricity, sell it back to the grid, or provide heat. This is not a big man's game, necessarily. And if we can take that syngas and convert it to... It's an interesting avenue. What you mean, I don't know if you're talking about, but we've developed smaller systems, and the big gain is in the land-based, is in the hundreds of tons and things like this, which we would probably, the strategy there would probably end up being, at that end, let's say the 100 tons and more, we team up with someone. 100 tons and less, we can do on our own.

speaker
Steve

I mean, that's just a... So does that mean that, for example, if there were somewhere else a, you know, there's a trash repository, and you'd be able to apply your system to that? Well, it's something like the... Maybe I'm getting this wrong, but what my vision here is, you're pulling, you know, maybe I'm... all off base here, but I'm presuming there's a, you know, you're pulling methane and stuff out of trash, out of a trash heap, you know, or is that not correct, or am I off base here?

speaker
Peter Pascali

Well, no, no. On our land-based systems, see, what we do is we take garbage and we destroy it, and we convert the organic component into a syngas, which runs an engine, which can then supply electricity to the grid or back to the system so it operates self-sufficiently. So on the land-based side, what we're doing is we're not sitting on top of landfills collecting methane. No, no, no. On our land-based side, we're actually taking waste, like municipal waste, or if you're inside the fence of a pharmaceutical, the pharmaceutical waste, or on an island waste. So it's a step up from what we do on the U.S. aircraft carrier. Except the US aircraft carrier doesn't need electricity. But you take that basic concept, put it on land, and then what the syngas you use for, you turn that syngas into something valuable, which in this case would be heat or electricity. And what I'm trying to suggest is the acquisition has a technology that can convert, possibly convert that syngas into a higher value commodity. So it makes that whole side more valuable, the whole land-based side more valuable. But I don't want our listeners to think that our focus is on our acquisition and land-based systems exclusively.

speaker
Steve

And the real excitement, the older exciting, of course,

speaker
Peter Pascali

And if there was nothing else, it would be extremely exciting. But the most exciting things that are happening in the company are actually what you touched upon earlier, the 3D printing powder stuff and our torch application to reducing greenhouse gases in various industries.

speaker
Steve

All right. Our next question is, and if I'm going on too long, I can come back if there were other questions. I want to know more about the silicone stuff, the PureVac stuff, where that is. if you have any expectation of timelines and where that's going, because that seems to have a lot to it. And it somewhat confuses me.

speaker
Peter Pascali

Yeah. So on QVAP, I mean, that's the HPQ side of it. And I don't mean to be avoiding Steve, but I am not current. I mean, I can make mistakes because here because I can't remember what HPQ has press released and what we press released. I'm going to be just general here in speaking about HPQ. We press released something, I think it was last week or recently, where it was a significant milestone that was reached in the process. The next step is going to be extremely exciting as well. We're very happy with where we are with respect to HPQ. I don't want to say anything because I'm afraid, Steve, that I might say something that hasn't been publicly released. It's tough enough for me to remember that for my own company. So when it comes to PureVap, I let our clients speak to that.

speaker
Steve

All right. Okay. I'll let that go. I just don't. I understand the concept is new, and I understand that there's a need for what you're doing, but I guess the real question here in any of these things would be, as a stockholder, certainly I would like an expectation of what's a reasonable timeline wherein you'll start realizing you know, sales or whatever, um, and, and, and so forth. Um, all right. So the last question, the last question, go ahead. Okay. No, no, no. I mean, I, I, that's, you know, I, I, I, we, we, I can write you on this. Uh, the, the last question I guess is, uh, one of the things that, um, you know, that I thought, you know, one of my questions, you know, and I, and this is in your, you know, this is complimenting you. So, so let's not, let's not state that I don't, you know, I was a businessman. I ran a, I was a chemical manufacturer. I appreciate what you're doing. You know, and I was happy to hear, I think last year that, you know, some of the, Like, for example, the DrossRite, if I recall, you have an operation in the United States, correct?

speaker
Peter Pascali

We sold our DrossRite systems to a company that has a facility in Mexico, but it's headquartered in the United States. And we sold our largest systems, our technologies being used in Saudi Arabia.

speaker
Steve

But, for example, if all these, the question really, I think my question originally stemmed, if let's say all these orders come in as you're projecting, I had asked you the question, how are you going to fulfill the orders? And you said, well, you know, you have subcontractors and so forth, and you do have the instructor to be able to do that.

speaker
Peter Pascali

Yeah.

speaker
Steve

I mean, that's a wonderful problem, but the real question is, if all these things hit at once, are you going to be able to cope with it both people-wise, supply-wise, and cash flow-wise?

speaker
Peter Pascali

Steve, I hope that we get so much business that we won't be able to cope with it. I mean, that's our goal eventually, and then people can criticize me about that. But as it stands right now, It sounds like when you ask this question or somebody asked this question in the previous quarters. We have established ourselves so that we don't have to produce on-site. In fact, I can't recall the last Dross-Rite system that was produced on our site. They're all produced somewhere else and drop shipped. We can do the same thing with torches. If things go extremely well and crazy well, The backbone will be basically having enough project managers to manage the suppliers. You can't just let suppliers produce. You have to go, you have to keep on top of them, you have to make sure they're manufactured according to your specs, you have to check it out, things like that. There's always problems. Nothing works 100% well. You need to have people in place to be able to manage the number of suppliers. So that might be a place where we have a bottleneck. But the fact is that we're cognizant of that potential risk if things go really, really, really crazy. So we could probably address that risk given that we've already identified it. The fact that we've actually established our commercialization efforts to de-risk it so we don't have to have the manufacturing facilities in place and the labor in place before the contracts come in is one of the most amazing things we've done in addressing these two particular marketplaces, which is draw us right and towards production. So right now, we don't see that to be an issue. What we don't see to be an issue is capacity. We don't see that to be a problem right now. However, we do know that there's labor supply issues taking place across the globe, that would be challenging even in normal times. But on that note, we do see that pressure coming off a bit, particularly over the past couple of months in terms of supply. We see that the candidates out there, there's more of them, and their demands are becoming a lot more reasonable than what they were maybe towards the summer and in the summer months.

speaker
Steve

Okay. All right. Thank you very much.

speaker
Peter Pascali

Steve, thanks a lot. Good to hear from you. Thank you. Now, Mike, if there's any question out there that Steve hasn't asked.

speaker
Operator

And one moment for our next question.

speaker
Steve

Yeah.

speaker
Operator

And our next question comes from the line of Mike Roberts with Imperior. Your line is open. Please go ahead.

speaker
Mike Roberts

Good morning, guys. How are you?

speaker
Peter Pascali

Pretty good.

speaker
Mike Roberts

My first question actually is just about the in the financials, there's the $3.6 million sale of IP. I was just wanting some clarity on that, like who exactly that was sold to, kind of what the terms and deal is, and if possible, if you could let me know why it wasn't press released for a company that just had to do a raise that seems to be a A $3.6 million sale is kind of the definition of material. So it was just sort of surprising to see it in the financials and it hadn't been mentioned before.

speaker
Peter Pascali

Well, we think it's important. We don't think it's material. We think it's important. As our CFO mentioned, we'll be talking more about that as our client becomes in a better position to press release at the same time. And until then, we won't talk about what the IP was, who it was with, or anything of that sort. However, our CFO, if you want to, Andre, may want to talk about why we had to account for it the way we did. It's really just like what Peter said. It's a regular sale. It's a sale that accounts receivables. There's no unusual payment terms. It's really an account receivable, a sale of $3.6 million. And the only reason, as I mentioned, we didn't disclose it is as a way for our customers to disclose it in their press releases as well.

speaker
Mike Roberts

Okay, thank you. Other question would be just about the backlog and what makes that up and just if there's a reason why what makes up the backlog isn't sort of specified or put into like a list form. If it's all signed and awarded contracts, I would like to see sort of a breakdown of what exactly makes up the backlog if that would be possible.

speaker
Peter Pascali

It's an interesting question. There's also a big reason why I don't detail it, but what I can give you in terms of breakdown is a little bit by nature, which matches a bit of our revenue. The biggest items in the backlog right now is Dross, right? Probably around the $8 million mark, followed by the Biogas upgrading, close to $7 million. We have Torch sales and PureVap, each between $3 to $4 million. So that's the majority of the backlog. If I look in terms of territory, probably half of it is in Canada, followed by some in the U.S. and a large portion in South Africa. Okay.

speaker
Mike Roberts

I think in the last... Sorry to interrupt. In the last earnings call, I think there had been somebody to ask about the breakdown of the backlog in that one as well. And you had mentioned that the PFAS made up a significant portion of it. So I just wanted some clarity on that and what exactly that was.

speaker
Peter Pascali

What was what? The nature of PFAS?

speaker
Mike Roberts

No, when I think it was somebody from Cormac maybe in the last earnings call asked what were the three main things that made up the backlog, you had mentioned that some of the PFAS stuff was one of the three largest components. So I just wanted some clarity on that and if that's still in the backlog.

speaker
Peter Pascali

Backlog and awarded contracts. So let me give you some philosophy behind this, Mike. So we will announce things. For instance, when we were doing the major gross right deal of $20 million, we announced that there was something in the pipeline that was very significant, and we didn't talk about the industry, but we said it's very significant and it could be of certain value. Why would we do that? or at the same reason, why would we announce something that is awarded but not signed? It's because people on the other side of the table have that information as well. And it's to protect investors. I don't mind if investors sell or investors buy, but I think it's my duty to try and inform the public as best as I can of what is happening. And then they can make a well-informed decision. For instance, back in the day, when we announced several months before the contract was signed for that large draw strike deal of over $20 million, I think people want to know that's in the offing or could be in the offing. It's not signed, but it could be in the offing. And if they wanted to sell them, that's up to them. Or if they want to buy them, that's up to them. But I think they'd be really ticked off if we had that information and they sold a day or two before that was announced. So that's one reason. And what I'm trying to protect investors from as best as I can is... from the people on the other side, in maybe other countries, other jurisdictions where the laws aren't as strict as they are here, taking advantage and buying shares from investors who don't have the same information as they do. So that's why PFAS was announced as awarded but not yet signed. And we're very clear on the prices. It hasn't yet been signed. But we wanted to put it in and make people understand that, and so we put it in backlog and awarded. All right? So that's That's the subtlety and the logic behind this. Sometimes managing this type of information, you have to make decisions which are not all the time servicing everybody in the same way. We're trying to get the information out there as best as we can, and we assume that the people that are reading it have the intelligence to understand what we're doing. So that's the story behind PFAS. The reason why it went off the table is because we would not give up our IP to the people who wanted it in order to move forward. That's the story. I think we've said enough about that and we've talked enough about that. Do you have another question, Mike?

speaker
Mike Roberts

Yes, actually. About the receivables, some of it is quite old. I know you've said that you're confident in it's all good, but Is there some more clarity you can provide about why some of these receivables, like it seems like a fairly large chunk of it is, you know, up to 12 months or more old? Is there, can you sort of give a reason?

speaker
Peter Pascali

Yeah, so Mike, I've done this before and I'll do it again. Okay, so first of all, our CFO mentioned that, or I maybe mentioned that, not only has it been reviewed internally, passed by our board, but it's also been reviewed by our accountants. And no reserve was necessary. So they have a hell of a lot more information than you do or anybody else out there does. And so they made that decision. That's something that you may want to understand, which is news to me. But if you reach a different understanding with a client based on his payment terms, you cannot change that receivable amount. I don't know if you understand what I'm talking about. If you have a contract, and let's say the person is supposed to pay you $1,000, and you bill them for it, it goes into your receivables. But if you tell them, okay, you don't have to pay the $1,000 today, you can pay it in a year from now, it's still in your receivables. Okay? So you'll notice, I think we've mentioned in the past, did we mention about US Navy? There's the two basic areas of the receivables. Did we mention that? Yeah, it's basically US Navy... and the money coming from a gross right sale to Saudi. We also mentioned that the certain delay with US Navy, you know, AAA name and you can't get better than that. So I don't think you have a problem with that. And the other one you saw recently that they started paying again. And we've said that we understood and knew from the outset that there will be delays in payment because the money was being allocated to something that actually serves us at the end better. So the client approached us, we understood what was happening, we said, okay, it makes sense for us, it makes sense for you, it makes the future much better for all of us. You've got a green light, but we cannot change the AR. The accounting principles won't let us. But what you do have is that we, our board, and now the accountants have looked at it and they all agree that with all the information, there's no reason to take a reserve. And that sums it up. That sums it up. I can't explain it much better than that, Mike.

speaker
Mike Roberts

Okay. I don't know if you'd be able to tell me this, but what was the cash allocated that would be better for you than actually getting paid? What was that allocated to, or what's kind of in the works there?

speaker
Peter Pascali

What's he talking about? Sorry, Mike, what are you talking about? Where are the customers at?

speaker
Mike Roberts

You said it. You had said that the decision was made to delay payments because that cash had been allocated to something else that was better for you. So I'm wondering, what was it allocated to that's better for you than actually getting paid?

speaker
Peter Pascali

I can't tell you that, Mike. I can't tell you that. Okay, well... You know, but you can imagine. You could just put... It's not... You can use your imagination and figure out that there may be lots of things that could be that would make a lot of sense under the circumstances. But we'll just let it be.

speaker
Mike Roberts

Okay. All right. Well, I think that's all my questions. Thanks very much, guys.

speaker
Peter Pascali

All the best, Hugh. Thank you.

speaker
Operator

Thank you. And I'm showing no further questions at this time, and I'd like to turn it back over to management for any closing remarks.

speaker
Peter Pascali

Thank you very much for joining us today. I hope that we're able to answer as many questions as we can within a lot of time. Feel free to email us with questions, and we'll do our best to answer them within the public available information. And if we can't, we'll take cognizance of it and try and answer them in a future press release on the topic. Thank you very much. Thank you very much. I look forward to seeing you and speaking to you in the near future. All the best. Thank you.

speaker
Operator

This does conclude today's program. Thank you for participating.

speaker
spk01

You may now disconnect. Everyone, have a great day. To raise your hand during Q&A, you can dial star 1 1.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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